U.K. Tax Rules That EU Panned Win Ally at Highest Court

European Union tax regulators suffered a setback as an aide to the bloc’s top court sided with the U.K. in a clash over the nation’s corporate tax system.

Rules that EU authorities criticized for making it almost “impossible” for companies to claim tax relief on non-resident subsidiaries are justified, an adviser to the EU Court of Justice said today.

“The contested U.K. rules on group relief go even further than is required by” EU law, Advocate General Juliane Kokott of the EU Court of Justice said in a non-binding opinion. The Luxembourg-based ECJ follows such advice in a majority of cases.

A defeat in the case would be a possible obstacle for the EU as it seeks to take more of a grip on company tax affairs across the 28-nation bloc. In a separate clampdown, the European Commission’s competition department has targeted potentially unfair tax breaks for multinational companies from Apple Inc. to Amazon.com Inc.

A ruling in line with Kokott’s opinion “would go against a long line of cases concerning outward investment and would effectively open up the door to discrimination in cross-border cases,” said Chris Morgan, head of tax policy at KPMG LLP in London.

‘Same Position’

Kokott “thinks that a U.K. company investing overseas is not in the same position” as one investing in a U.K. subsidiary “and so can be subject to different rules,” he said. This would mean being “barred from ever using the losses of a subsidiary.”

Her Majesty’s Revenue and Customs, the U.K. tax authority “notes the advocate-general’s opinion and awaits the court’s decision,” according to an e-mailed statement.

Today’s case is one in a series attempting to clarify an EU court ruling dating back to 2005 involving Marks & Spencer Group Plc. In that decision, an exception was created for cases where companies based in the U.K. can claim tax relief on losses by foreign subsidiaries. The so-called Marks & Spencer exception has since then “proved to be impracticable,” Kokott said.

The EU sued the U.K. last year over its rules, arguing they “make it virtually impossible in practice” for group relief claims to succeed by preventing “any relief at all for the losses of a non-resident subsidiary.”

The conditions created in the 2005 ECJ ruling “are anything but clear” and subsequent cases and debates seeking further clarification have shown “a very wide range of interpretations” of the M&S ruling, said Kokott.

‘Virtually Inexhaustible’

“I take the view that a review of the appropriateness of the Marks & Spencer exception is both possible and necessary,” she said. The system created in the ruling nine years ago “does not facilitate the activity of cross-border groups, but rather constitutes a virtually inexhaustible source of legal disputes between taxpayers and” EU nations’ tax administrations.

Emer Traynor, a spokeswoman for the commission in Brussels, declined to immediately comment on today’s opinion.

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